India looks to ease pain from cash crunch in budget

[NEW DELHI] India's government is expected to ramp up spending in its latest budget this week, seeking to ease the pain from a ban on high-value banknotes that slammed the brakes on the world's fastest-growing major economy.

Ahead of a series of elections, Finance Minister Arun Jaitley will unveil a budget on Wednesday that analysts say will aim to offset the impact from the so-called demonetisation programme with stimulus measures.

"The overarching focus of the budget will somehow indicate a gain from pain mentality - how the pain of demonetisation helped the government get some extra resources that it can now spread around," Rajeev Malik, senior economist at brokerage CLSA, told AFP.

"It's going to be a budget that is meant to soothe the pain." Before Prime Minister Narendra Modi's shock decision in November to pull all 500 and 1,000 rupee notes from circulation, the International Monetary Fund had forecast India's economy would grow 7.6 per cent in 2016, faster than any other major country.

But as authorities struggled to print replacement notes fast enough, causing consumer spending to plunge, the IMF knocked a percentage point off its forecast. The government's prediction is 7.1 per cent growth.

By painting demonetisation as a blitz on corruption and cash-hoarding that will ultimately boost tax revenues, Mr Modi has so far escaped a major backlash. While there were massive queues outside banks in the weeks afterwards, they have now subsided while limits on withdrawals have eased.

But voters in four states - including the key battlegrounds of Uttar Pradesh and Punjab - will have a chance to deliver their verdict when they begin going to the polls in multi-phase elections from February 4.

Analysts say the polls are another reason why the government will be tempted to increase spending on health, education and a rural employment scheme.

AFP